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What is a lease?
a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
What does a customer have throughout period of use?
The right to obtain substantially all of the economic benefits from use of the under-lying asset (e.g. by having exclusive use of it)
The right to direct the use of that asset.
What is a lease term
length of the lease
What does IFRS16 require?
at the commencement of a lease, it should recognise a right of use asset and corresponding lease liability
What is the right of use asset?
an asset that represents a lessee's right to use an underlying asset for the lease term
When are right of use assets and lease liabilities not applied?
Short term leases, < 12 years
Leases where the underlying asset has a low value
-The payments here are an expense and spread over lease term on SL basis
How to measure right of use asset
measure at cost and add:
initial measurement of lease liability
lease payments before or at commencement
initial direct costs incurred by lease
estimate of costs incurred in dismantling, removing, restoring
How to carry out the initial measurement
The lease liability is measured initially at the present value of the lease payments which fall due after that.
Discount these payments at the interest rate implicit in the lease or at the lessee's incremental borrowing rate.
Cost model
The right-of-use asset is measured subsequently at cost less any accumulated depreciation (IAS16) and accumulated impairment losses (IAS36).
cost- acc dep- acc imp
Revaluation model
If the right-of-use asset relates to a class of PPE to which the lessee applies the revaluation model, then the revaluation model may also be applied to the right-of-use asset.
Fair value model
If the lessee applies the fair value model to investment property, then the fair value model should also be applied to right-of-use assets which meet the definition of investment property.
For liability to the lessor
Each lease payment is apportioned between the interest (or finance charge) element (which is recognised as an expense) and the amount which reduces the outstanding liability.
What does IFRS16 require for interest on liability
It should be calculated to produce a “constant periodic rate of interest on the remaining balance of the lease liability"
What is the interest rate applied?
The discount rate which was used when initially measuring the lease liability.
What does IFRS16 require for presentation of ROU assets?
Lessees should present them separately from other assets in BS or disclose the line items in which right-of-use assets are included
Presentation of lease liabilities
Lessees should present lease liabilities separately from other liabilities in BS or disclose the line items in which lease liabilities are included.
Where does interest on lease liabilities go?
It goes on finance costs on SoCI
What does IFRS16 require lessee’s to disclose?
The dep charge for ROU assets
Interest expense on lease liabilities
Expenses relating to leases of short term assets and low value items
The carrying amt of ROU assets at the end of the reporting period